PHI Benefits and Contract Risk

The Importance of Clear Drafting

The provision of insured benefits to employees necessitates particular care when it comes to drafting entitlements. This is the case not only within the employment contract itself but also in any ancillary documents such as offer letters, HR policies and communications.

The central risk is uncertainty over what exactly has been promised, and in particular what the employer is obliged to provide. Clauses which promise that an employee “will receive” income protection or similar support, may be interpreted as a promise from the employer to provide and fund the benefit itself, where appropriate conditions and caveats are not included. This can lead to significant unintended costs for employers who could be liable for the benefit itself or any shortfall.

Taking the example of PHI policies, which are typically backed by a third-party insurer, to mitigate these risks, when drafting terms around PHI benefits in the contract, the drafting should make clear that:

• The employer is only providing access to a third-party PHI insurance policy rather than guaranteeing a stated level of benefit to the employee
• The employer reserves the right to amend, replace or discontinue the benefit at its own discretion
• Entitlement to the benefit is subject to the insurance provider’s rules and the insurer accepting the claim, and may change if the policy is amended or replaced. Any particular limitations or conditions of the underlying insurance policy should be brought clearly to the employee’s attention
• The employer’s obligation is limited to paying the premiums under the policy, and that the employer is not funding the benefit personally if the insurer refuses or fails to pay

Termination May Not Remove the Risk

Case law has demonstrated that entitlement to insured benefits might continue after employment ends.

For instance, case law has previously considered that a term may be implied into an employee’s contract where they are covered by a PHI scheme during employment, limiting the employer’s ability to dismiss them during sickness absence (except for serious misconduct), where this would deprive them of the benefit. Recent case law has taken a different approach – by treating the employer’s obligation to provide PHI as a separate (‘collateral’) promise – to justify the employer’s ongoing liability for PHI benefit payments following dismissal. This meant the obligation to provide the benefit therefore continued even after employment had ended.

Given the risk that dismissal may not always end an employee’s rights to sickness related benefits, employers should make sure their contracts are clear, including spelling out explicitly how long benefits last, when they stop and how they are affected by the employee’s employment ending. Employers should also take advice when considering dismissal for someone on long-term sick leave and where there are PHI benefits in place as getting it wrong can be costly.

Conclusion

Insured benefit clauses are easy to overlook as boilerplate, but care should be taken to ensure that the contract matches the intended commercial position: what is promised, who bears the risk if insurance does not cover the claim, and when any entitlement ends. In any event, employers should take care when considering dismissals in such circumstances.

With the Employment Rights Act 2025 changes set to make it more challenging for employers to impose contractual changes on employees (expected in January 2027), now is a good time for employers to be reviewing their template contracts and ensuring their drafting is robust to mitigate risk down the track.